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BCom 1st Year Methods of Study in Economics Notes Study Material

BCom 1st Year Methods of Study in Economics Notes Study Material

BCom 1st Year Methods of Study in Economics Notes Study Material

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BCom 1st Year Methods of Study in Economics Notes Study Material
BCom 1st Year Methods of Study in Economics Notes Study Material

BCom 1st Year Methods of Study in Economics Notes Study Material

1. Introduction

By methods of study, as used in Economics, are meant the procedures that economists employ to derive economic generalisations. These generalisations or laws are useful in the formulation of policies designed to solve economic problems. Economic generalizations (theories) are developed in somewhat the same way as they are developed in other sciences. The following procedure is generally employed by economists:

(i) Economists first gather facts which are relevant to consideration of a specific economic problem. This aspect of his job is sometimes called “descriptive economics”.

(ii) A mass of facts is relatively useless; in other words, mere description is not enough. To make them useful facts are systematically arranged, interpreted and generalised upon. This is the task of economic theory or analysis. Facts, that is, how individuals and businesses actually behave in producing, exchanging and consuming goods and services change with time. So it becomes necessary that existing principles and theories must be continuously checked against the changing environment.

Economists thus observe economic events, attempt to find patterns in them, formulate theories about them, test their theories and finally apply them. While generalizing from the observation of data we are likely to commit two types of mistakes in reasoning. First is the fallacy of composition. We commit this fallacy when we assure that what is good (or bad) for one is necessarily good (or bad) for all. Second refers to cause-effect fallacy designated as post hoc, ergo propter hoc, that is, after this therefore on account of this. Here we jump to conclusions that are not warranted.

Different schools of thought have asked different types of questions and have used different tools of analysis. The Historical School or the Classical School, for instance, were concerned with economic laws governing the progress of society through time. Neo-classical economics, on the other hand, asked questions about the allocation of existing resources and so different sets of theories, concepts and tools were used.

Economists have, therefore, differed about methods. If ends are different, means have to be different. Some economists have used the deductive, abstract or hypothetical method, while others have shown preference for historical, inductive or realistic method. We can also talk of psychological method, mathematical method, the static method, the dynamic method, the micro-analysis method and the macro-economic method.

The most commonly used methods have been the deductive and inductive methods.

2. Deductive and Inductive Methods

Marshall says that there is not any one method of investigation which can be called the method of economics. Every method can be made serviceable in its proper place. The business of economics is to collect facts, to arrange and interpret them and to draw inferences from them. In the words of Schmoller, “Observation and description, definition and classification are the preparatory activities. But what we desire to reach thereby is a knowledge of the interdependence of economic phenomena…. Induction and deduction are both needed for scientific thought as the left and right foot are both needed for walking.”

(a) Deductive Method

The Deductive method, also called Analytical method, Abstract method or A Priori method, was widely used by the English Classical economists, David Ricardo, in particular. Here the argument proceeds from the general to the particular. Proponents of this method assume some indisputable facts about human nature and then draw inferences on this basis.

One such unquestionable character of human nature is the fact that all men are guided by self-interest in their daily life. On the basis of such a general proposition, conclusion is drawn about the behaviour of a particular individual. An example of deductive reasoning often used in logic is given below. It is first assumed that mortality is universally true about all living things, including human beings. On this assumption, then, we draw conclusion about a particular person and say that he too will die. In the form of syllogism, it is put thus.

All men are mortal.

Ram is a man.

So Ram is mortal.

Merits: (i) In the case of complex economic phenomenon, cause and effect are inextricably mixed up. Deductive method is useful in the analysis of such cases.

(ii) If the assumptions or premises are correct, conclusions drawn must also be true. It is the great merit of this method that it is free from the bias of the investigator.

(iii) It is very simple and easy to apply. There is no need to collect detailed statistical information.

(iv) Economics is a social science and its subject-matter is human behaviour. Such behaviour cannot be subjected to laboratory experiment as is done in the case of Chemistry or Physics. Deductive method is most useful for such a subject.

Limitations: (i) Deductive method is simple, effective and certain provided the assumptions are correct. If they turn out to be faulty or invalid or untrue, that is, if there is a wrong use of ceteris paribus (other things being equal) assumption, conclusions drawn from it cannot be true or valid.

(i) Economists agreeing deductively assume that their laws are universally true at all times and all places. It is certainly a wrong assumption.

(iii) Conclusions of deductive reasonings are not verifiable. As Nicholson put it, “the great danger of the deductive method lies in the natural aversion to the labour of verification.”

(b) Inductive Method

The Historical School of economic thought, as developed by a group of German Economists in the nineteenth century, was critical of the Classical School which followed the deductive method of making hypothetical premises, deducing conclusions from them and making no attempt to verify the results. Schumpeter called this procedure “the Ricardian vice’.

In the case of the inductive method, premises are formulated or generalisa. tions are made on the basis of collected facts, that is, empiricism. Such premises or generalisations are tested against other empirical data. Deductive reasoning proceeds from general to the particular, whereas inductive procedure goes from the particular facts to the general premise. If we take the example given above in the case of deductive method, the procedure for inductive reasoning would be like the one given below :

Ram dies.

Shyam dies.

Mona dies.

So all men die.

In this case the general premise is derived from observations of particular cases. Such generalisation involves an inductive leap-a leap in the dark. It is possible to test the validity of this generalisation by further observations of particular cases.

Merits: (i) The inductive method can be applied to check the validity of generalisation derived from deductive reasoning. In other words, it is a useful complement of the deductive method.

(ii) It is often argued that economic phenomena are very complex-too complex to lend themselves to deductive reasoning. Economic generalisations lack universal validity; they are not true in all places and all times rather they are relative to time and place. Inductive reasoning is more suitable for them because it is based on facts and empirical observations.

(ii) Inductive method is more suitable and useful in the formulation of economic policies for a particular economy or a particular situation.

Demerits: (i) It is likely that inductive generalisations might be based on insufficient facts or insufficient observations. In that case some important facts might have been ignored and the conclusions drawn might be invalid. It is like “effectively putting the theoretical cart before the factual horse,” in the words of Colin Clark.

(ii) Inductive method is subject to the danger of bias or partiality of the investigator. In other words, personal bias of the investigator may vitiate the result.

(iii) Inductive reasoning not aided by analytical judgment is a not suitable basis for prophecy. This view was expressed by L. Robbins. In his words, “For if there is one thing which is shown by history, not less than by elementary logic, it is that historical induction, unaided by the analytical judgment, is the worst possible basis of prophecy.”

3. Correct View

It is not correct to hold that either the deductive method or the inductive method acting singly can provide a proper and suitable basis for the study of economics. Boulding has rightly said that “Theories without facts may be barren, but facts without theories are meaningless.”

The interplay between facts and theory is very complex. So for principles and theories to be meaningful, statements must be drawn from facts, and facts, in turn, must serve as a constant check on the validity of principles.

Marshall, concurring with Schmoller, says that all “the devices for the discovery of the relations between cause and effect, which are described in treatises on scientific method, have to be used in their turn by the economist : there is not any one method of investigation which can properly be called the method of economics, but every method must be made serviceable in its proper place, either singly of in combination with others.” So “true solution of the contest about method is not to be found in the selection of deduction or induction but in the acceptance of deduction and induction”, states Wagner.

Our conclusion about the method of study of economics is then that a true scientific method must proceed through the following three different stages, namely,

(i) construction of theories,

(ii) derivation of conclusions from theories, and

(iii) the testing of theories.

Both deduction and induction are to be used, but where to be used depends on the nature of enquiry, the material in hand and the stage at which the inquiry has reacted.

There always has been and there probably always will be need for the existence side by side of economists with different aptitudes and different aims. Some of them turn to the ascertainment of facts, while others attach more importance to scientific analysis. “It is to be hoped that these two schools will always exist; each doing its own work thoroughly, and each making use of the work of the other”, says Marshall.

BCom 1st Year Methods of Study in Economics Notes Study Material

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